Oracle: Seeing Red (Hat)

Last week at its OpenWorld conference in San Francisco Oracle announced that it will be distributing and offering support for Red Hat Linux as well as offering its own Linux distribution based on Red Hat's source code; Oracle’s distribution will be named Unbreakable Linux 2.0. This move may have broad implications for both companies, the future of Linux, and the software world in general. The day after the announcement Linux Magazine put it this way, “Oracle was predicted to make a big Linux announcement this week and you would be hard pressed to make a bigger one than this.”

What Oracle intends to do is offer all the support for Red Hat Linux server that Red Hat does, as well as additional levels of support that the company says Red Hat cannot supply. All this will be done at a fraction the cost current Red Hat Linux users pay for such services. According to CRN, “Oracle support will cost $399 per year for a two-CPU box vs. $999 per year from Red Hat. A Basic Oracle option is $99 per year vs. $2,499 for Red Hat Enterprise Linux Premium support.” For its Unbreakable distribution, which will cost $99 for support services and updates, Oracle will take on the task of fixing bugs in Red Hat Linux, remove any trademarks, and add Oracle specific features. (Red Hat charges from $399 to $999 per year for similar services.)

Red Hat’s response has been to remain firm and optimistic. The first indication of this stance came when Red Hat’s CEO Matthew Szulik stated that the company will not be cutting its pricing despite Oracle’s move. Questions as to whether holding firm at this time is a poor business move, a public relations maneuver to cover the fact that Red Hat is running scared, or a demonstration of Red Hat’s confidence may be moot. It could simply reflect that Red Hat does offer pricing reductions, or will in the future, but decides not to discuss these publicly; such deals are common in the software vending arena. Brad Reback, an analyst with CIBC World Markets, told Reuters, “Red Hat has always done what it's needed to do to remain competitive . . . You have a pricing discussion with your customers when you need to have that discussion.” According to Linux Magazine further indication of Red Hat’s optimism came via email. “Oracle's announcement further validates open source and Red Hat's technical leadership . . . We will continue to optimize Red Hat Enterprise Linux for Oracle and compete on value and innovation.” This may be putting a positive spin on things, but the comment that Oracle’s move validates Red Hat is not unfounded; by choosing Red Hat, Oracle is essentially endorsing this version of Linux.

Wall Street failed to see the silver lining however; Forbes says that after the announcement, “Red Hat lost about a quarter of its value on Thursday, falling $4.59 to $14.93.” Though recovering slightly, Red Hat is still not fully recovered from what Reuters calls the, “the sharpest fall in the stock since the company went public in 1999.” Though Red Hat may be painting a rosy picture of things, Wall Street does not represent the only group that is expressing doubts, or at the very least being open about the challenges now facing the company. “Revenue from support contacts are the foundation of most open source business models, and Red Hat is no exception. What Oracle has done is really a worse-case scenario for any open source business,” says the Linux Magazine article. Aside from the financial concerns, be they altruistic or not, there are some in the Linux community that are expressing concern that Oracle’s move could fragment the Linux environment.

Fragmentation would be out of line according to Ellison’s stated objective in making the move in the first place, which was to, “enhance and speed the adoption of Linux and make it mission critical in the datacenter.” During the announcement Ellison noted several times that, “You can’t fragment Linux.” Furthermore, the Financial Times states that, “Countering warnings from some observers that its entry might fragment the fast-growing Linux world, creating multiple incompatible ‘distributions’ of the software, Oracle promised that its version would be identical to that produced by Red Hat. A NetworkWorldarticle, however, provides a different take. “Red Hat counters this argument by saying that Oracle’s efforts will lead to two different versions of Red Hat, which may be incompatible with each other. Also, Red Hat’s hardware certification and other system guarantees will not be applicable to customers who switch their service or code over to Oracle’s offerings.”

On the other side of the coin, there are those that think, despite its size, Oracle will be unable to compete with Red Hat. Steven J. Vaughan-Nichols, writing for Linux-Watch, says that as for support Oracle doesn’t even do a good job on its own products. He points out that Oracle recently released an, “a mega-patch of more than 100 bugs for its existing lines,” and that according to Cesar Cerrudo, CEO of Argeniss, a database security research company, “What's amazing is there are still a lot of unpatched vulnerabilities, even after this big batch.” What cannot be denied is that over the past 13 years Red Hat has become the world's largest distributor of the open-source Linux operating system, it now commands more than 80 percent of the market. A Knight Ridder news service article points out that Red Hat is not without clout and could even go head-to-head with Oracle. “Analysts and customers suggested Thursday that Red Hat might introduce products to compete with Oracle's core database software and partner with the software giant's main competitors, namely SAP, Sybase and Microsoft.” Szulik is not dismissing such thoughts either; in fact the opposite is true. The same Knight Ridder source quotes him as saying, “Maybe those relationships could become even deeper . . . I think you should anticipate that.”

Perhaps the second most asked question, after what the impact of all this will be, is why Oracle chose this path in the first place. Of course Ellison says that it is to push Linux further into the market, and there is doubtless some truth to that. Since Oracle products run on Linux the more big users there are the more money Oracle stands to make. But people are asking, why not just let Red Hat do the heavy lifting and let Oracle reap the benefits? Again Ellison’s take is that Oracle and its customers are not satisfied with the support that Red Hat has provided and by shouldering the responsibility Oracle is making sure all are happy. There may be some truth to this as well, but there are a host of other reasons being suggested. Some say that Ellison’s Oracle is trying to drive Red Hat’s stock price down so it can launch a takeover, similar to what it did with PeopleSoft. (Forbes says that with shares trading for what they fell to after the announcement, such an acquisition would cost Oracle just under $3 billion) Others think it may be a move to scare Red Hat Linux developers enough so that they will jump ship to the safety of Oracle. Still others think that Ellison wants to make a play for the number one spot of software vendors, now held by his rival Bill Gate’s Microsoft. (This rivalry is allegedly one of legend in Sillicon Valley.) Indeed, now that they are essentially offering an operating system with applications that run on it, Oracle could be seen as moving in that direction and competing more directly with Microsoft. Those that subscribe to this reasoning may also believe that Ellison is simply angry with Red Hat for buying JBoss before he could get his hands on it.

Whatever the rationale may be, the analyst view is that it will be at least a few quarters before the dust of Oracle’s endeavor settles.

A more complete version of this posting, with accompanying informational charts, journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Linux & Open Source section of Northern Light's Software, Computers, & Services Market Intelligence Center

And in the following articles:

Oracle Bloodies Red Hat’s Nose; More Damage to Come?
Network World, October 30, 2006
Oracle’s move to lure Oracle/Red Hat users to buy support from the database company, instead of the Linux vendor, could be a double-edged sword for users of each respective technology. Oracle said last week that it intends to offer its own version of Red Hat, along with services, such as software patches. Oracle will also offer support for Oracle customers who run Oracle database and other applications on Red Hat servers.

Red Hat CEO Says Won't Cut Prices Because of Oracle
Reuters, October 27, 206
Linux software distributor Red Hat Inc.will not cut prices even though bigger rival Oracle Corp. is launching similar services at steep discounts, Red Hat's chief executive said on Friday. CEO Matthew Szulik made the comments to cable channel CNBC a day after Red Hat's shares plunged 24 percent because Oracle Chief Executive Larry Ellison said he hoped to win over some of the smaller company's business with half-price offers.

Oracle Chief Outlines 'Unbreakable Linux' Strategy
ECommerce Times, October 26, 2006
Amid an enormous amount of buzz, software giant Oracle Latest News about Oracle laid out its plans for Linux at its OpenWorld conference in San Francisco this week, indicating that it will use Red Hat Latest News about Red Hat Linux as the foundation for an Oracle-branded "Unbreakable Linux." During his keynote Wednesday, Oracle chief Larry Ellison announced a Red Hat path that will promote the Linux distribution as an enterprise leader. However, Oracle will also compete with it, offering its own version of enterprise Linux, including free binaries and support starting at US$99 annually per machine.

A Red Hat for Ellison's Outfit?
Forbes, October 26, 2006
"Analyze Larry" is a favorite game in Silicon Valley, and everybody out here is trying to figure out just what dark motives lay behind Oracle's decision to attack Red Hat in the Linux market. Oracle chief Larry Ellison announced Wednesday that his company would sell support contracts to Hred Hat customers for less than half of what Red Hat charges.

Oracle Takes Aim at Red Hat
Washington Post, October 26, 2006
Oracle Corp. Chief Executive Larry Ellison is shaking up the software industry again, only this time a takeover bid isn't involved - yet. Ellison posed a challenge to Linux software leader Red Hat Inc. late Wednesday by announcing that Oracle would begin offering maintenance services for Red Hat products - and charge less for that than Red Hat does. Red Hat shares were crushed by the news.

Oracle's Gambit Crushes Red Hat Shares
BusinessWeek, October 26, 2006
After Oracle CEO Larry Ellison took the offensive in a price war against Red Hat Inc., investors sold the latter software company's stock more than 26% on Oct. 26. The Raleigh (N.C.)-based Red Hat is the biggest name in support services for Linux, a free operating system that millions of developers update via the Internet, while San Francisco Bay Area based-Oracle is among the largest enterprise software makers. Ellison already hinted earlier this year that he saw companies like Red Hat as a threat.

The Oracle Effect
Linux Magazine, October 26, 2006
The rumors turned out to be true. Oracle was predicted to make a big Linux announcement this week and you would be hard pressed to make a bigger one than this. Larry Ellison announced support for Red Hat and the release of Oracle's own Linux distribution based on Red Hat's source code at his Oracle OpenWorld keynote address on Wednesday. The new distribution and support model, dubbed Unbreakable Linux 2.0, puts Oracle in direct competition with Red Hat in such a way that it may not fragment the Linux marketplace.

Oracle Enters the Linux Arena
Financial Times, October 25, 2006
Oracle on Wednesday carried through on recent intimations that it might move fully into the Linux business, a step analysts said would change the dynamics of one of the fastest-growing parts of the software world. The US company said it would make available its own version of the open-source operating system under the new “Unbreakable Linux” brand. It also said it would offer bug fixes and full support for the software at a lower price than that charged by Red Hat, the biggest Linux company.

Oracle's Red Hat Rip-Off
Linux-Watch, October 25, 2006
No one saw this coming. People talked about Oracle making its own Linux, or buying a Linux company (Ubuntu?). But, the news that Oracle is erasing Red Hat's trademarks from Unbreakable Linux and supporting it for less than Red Hat is a bolt from the blue. Or, perhaps, I should say that Oracle is firing a shot at the heart of Red Hat, and commercial Linux? This really, really ticks me off. Oracle's claims as to why it felt it had to make this move are BS.